Australian Unemployment Trend - Case Study Example

Introduction Macroeconomic policy plays an important role in every country which influences many factors such as inflation, unemployment, growth rate of the economy, economic stability etc. Government of all countries on a continuous basis focus on this issues to increase the overall performance of the economy. However, two major issues which is always a sign of concern for any country in today’s world are rising inflation rates and increasing unemployment in the country and Australia is no exception to the same. Herein the assignment is divided into three major categories or sections. The first section highlights the Australian Economy in the last 10-15 years along with some of the major challenges that the policy makers face in building the macroeconomic policy, the second section throws light on the instruments and goals that are applicable to Australian policy and lastly a complete discussion of the macroeconomic policy by use of various economic theories which had already been discussed in the class Macroeconomic policy aims at maintaining four major objectives which are inflation rate, employment generation, economic growth and maintenance of external balance. Australia has experienced the same mostly a changing trend in three aspects inflation, unemployment and economic growth which has been discussed as under. Australian Inflation Trend Inflation is increase in the level of price in the economy over a period of time due to lower purchasing power. There can be three major reasons for cause of inflation which are cost push inflation, demand pull inflation and monetary inflation. Consumer Price Index is the most commonly used tool to measure inflation in an economy. The graph shown below shows the trend of CPI of Australian economy from the year 1993 to 2009. The graph is studied as CPI at the year end and the bar chart shows the level of CPI on Quarterly basis. We see that the inflation trend was stable during the 1990s and started to show a decreasing trend towards 2000 which was a good sign for the economy. However, the inflation rate showed a rising trend from 2000 and was quite stable at around 3% till 2007, and further increased to 5% in 2008-09 which was again followed by a decreasing trend (Neck & Behrens, 2004). Australian Unemployment Trend Unemployment is created when an individual who is capable and willing to work but is not able to find a job for himself due to both internal and external factors affecting job vacancies. Australian economy had seen a fluctuating trend in unemployment which can be explained in a better way by way of the following graph as discussed by Australian Bureau of Statistics (ABS) The graph shows the trend for the period of 2000 to 2010. In the year 2000 the unemployment showed a decreasing trend from 617100 to 582900 and then started to rise in the year 2001 and was around 682100 which was a sharp rise in unemployment and the economy was hit by a major recession. The Australian government then tightened the macroeconomic policy and we see a decline in the unemployment rate to 462100 in 2008. However, the economy then again experienced a rise in unemployment which rose to 662300 in 2009 and again a small fall in 2010 to 611000. Thus, unemployment has been a major concern for the Australian economy at present the rate is around 5% which is an area of concern (Mishkin, 2004). Australian Economic Growth Trend Economic Growth is an important factor for the overall development of a country. It is expressed as a percentage of increase in the real Gross Domestic Product of a country. In a lighter sense, it is the increase in the growth of goods and services in an economy over a period of time usually annually (Sullivan & Sheffrin, 2003). Growth Rate of Australian economy as shown in the graph surveyed by Australian Bureau of Statistics (ABS) shows a stable trend in the years. However, the economy had a seen a sharp decline in the year 2000-01 and then again a stable rate in the following years except in the year 2008-09 which again showed a sharp decline with negative growth and was an area of major concern (Love & Payne, 2008). Thus, we see that Australian Economy had more of stable economical conditions in the recent past. However, 2008 can be regarded as a landmark from where the economy has been majorly impacted on a negative side due to global financial crisis and Australian economy being hit by a Recession which majorly impacted its employment rate, growth rate and inflation rate (Friedman, 1953). Challenges faced by Policy Makers Australian policy makers mostly faced two major challenges in policy making which are inflation and unemployment. Inflation As already had been discussed that year 2008-09 showed a Global Financial Crisis which affected the whole of world economy and Australian economy was no exception. Australian Economy show a sharp rise of inflation from around 2.3% in 2007-08 to 4.4% in 2008-09 which was a major concern for policy makers since purchasing power of the Australian Dollar showed a sharp decline and prices of goods and services shoot up. This affected the consumer behaviour to a large extent and the buying behaviour of consumers. Policy makers constantly keep an eye on inflation rate prevailing in the economy and design monetary policy accordingly to keep the rate lower as possible. Unemployment Global Financial Crisis of 2008-09 further worsened the situation in Australian Economy by rising Inflation and rising Unemployment in the economy. Huge number of employed people went jobless as a result of cost reduction strategy used by companies to fight against inflation. This led to complete panic situation in the economy and was one of the major challenges that the policy makers faced (Cavallari, 2008). Policy makers used monetary policy to lower inflation rate and thus lower unemployment rate. Lowering the unemployment rate with more suitable jobs to the jobless is still an area of concern for the policy makers as it is one of the major factors to develop the economy and boost up the economic growth of the country (Haslag & Hein, 1992). Instruments & Targets in Macroeconomic Policies Macroeconomic policy plays a major role in maintaining economic stability and further help in developing the countries infrastructural facility. The macroeconomic policy is Australia is so developed or efforts or made to make it develop in a way that it ensure low inflation, low unemployment, high economic growth and least possible foreign obligations. To ensure the same Australian government will have to use certain macroeconomic instruments in a systematic manner (Cavallari, 2008). It is a universal truth that in order to judge a performance, targets need to be set and should be realistic. Australian Economy seeks to make target keeping in mind the long term objectives and short term objectives. One of the most important targets is to lower the inflation rate and maintain it at about 1.5% to 2.5%, other targets include low unemployment rate, higher growth rate, superior infrastructure and low balance of payment. Instruments are tools that help in achieving the targeted objectives. They are the most important factors in making a path for the policy makers to achieve the objectives both long run and short term. The macroeconomic policies which the Australian Government currently uses are Monetary Policy and Fiscal Policy which has been discussed as under: Monetary Policy Monetary Policies are governed by Bank of Australia in order to maintain the correct supply of cash in the economy. Monetary policy plays an important role in maintaining the inflation rate since monetary policy is governed with the supply of cash in the economy which in turn affects the purchasing power of the currency. The policies are so designed to ensure full employment level, stable currency, and economic progress and complete welfare of Australia (De Garis, 2009). It utilises open market operations to control money supply and interest rate of the economy. Fiscal Policy Fiscal Policy is another macroeconomic policy that is mostly used by all nations in today’s world. Fiscal policy is governed by two major factors which are Taxes and Government Spending. Just as Monetary Policy is mostly governed by Central Reserve Bank, Fiscal Policy is governed by Government to maintain a balance demand and supply in order to achieve the set targets (De Garis, 2009). It is to be noted that monetary policy and fiscal policy are interdependent on each other. These two policies are used in different combinations to achieve a countries economy goal in a systematic way. Further, Fiscal Policy are flexible enough and changed as per the economy requirement as an Expansionary Policy or as a Contraction Policy. Economic Theories learnt in class The Australian Government aims at attaining four major macroeconomic targets which are High and sustainable economic growth. Lower level of unemployment in the economy Lower level of Inflation Rate with higher purchasing power. A positive Balance of Payment. To attain the same two instruments or tools are commonly used by Australian Government which had already been discussed i.e Monetary Policy and Fiscal Policy. Further, these are in consideration with the Economic Theories that have been learned in the class. Major concern is the rising inflation and its causes and how the two instruments are designed to attain the macroeconomic objective. Reasons for Inflation Economic Theory focuses on three major reasons for inflation in an economy which are Cost-Push inflation: This is on account of rise in the labour and wage rate which increases the cost of the product and rise in the price of goods to cover the additional rise in the product cost (Soyoung, 2005). Demand-Pull Inflation: This result from increase in the demand of goods and services by consumers which is financed by easily available credits in the economy. As the demand increase following the Demand-Supply concept the price shoots up (Soyoung, 2005). Monetary Inflation: This results from increase in the supply of currency in the economy so as to cover up the large piling of deficits in both local and international trade (Soyoung, 2005). Thus, for a higher economic growth, low unemployment and balance of payment in the economy Inflation rate should be lowered with stable prices. Monetary Policy Inflation results in high supply of currency with low purchasing power of the same. In such a situation a Contraction Monetary Policy will be used to control inflation. The Contraction Monetary Policy will aim to limit or reduce the circulation of currency in the economy. Other factors which will be used to support the Contraction Monetary Policy is increasing the minimum bank requirements, increasing the interest rates and increasing the open market operations (Larch and Nogueira, 2009). This will help in deriving the money from economy into the banks and lower the inflation rate. It is to be further noted with a low money supply an Expansionary Monetary Policy will be used whose effects are just opposite of the Contraction Monetary Policy where the supply of currency is increased in the economy to control deflation (Sinai, 2009). Fiscal Policy With a higher Inflation rate in the economy a Contraction Fiscal Policy comes into play and is mostly opted by the economies in such situations. With higher inflation rate and lower purchasing power, a Contraction Fiscal Policy aims at increasing the taxation level with a reduction in the government spending to drain the excess resources in the economy (Andrés, Doménech & Leith, 2006). Similarly, in cases of Deflation or depressed economy, an Expansionary Fiscal Policy is opted and favourable. Here, the taxation levels are reduced with a simultaneous increase in the government spending so as to infuse some additional resources into the economy and lower the deflation rate considerably. Conclusion Thus, we see that the Australian Economy had experienced more of a stable economic condition in the last 10-15 years with relative lower ups and downs except in the year2008-09 when the entire globe was hit by a major crisis and Australian Economy was no exception to the same. Macroeconomic Policies which consists of both Monetary and Fiscal Policies were suitably designed in the Australian Economy and still policy makers are working on the same as a result of which Australian Economy has responded favourably and is slowly coming out of the effects of Recession. References Andrés, J., Doménech, R., &Leith, C. (2006). Fiscal Policy, Macroeconomic Stability and Finite Horizons. Scottish Journal of Political Economy, 53(1), 72-89. Cavallari, L. (2008). Macroeconomic Interdependence with Trade and Multinational Activities. Review of International Economics, 16(3), 537-558 De Garis, D. (2009). Australian Macroeconomic Policy: Bold Monetary and Fiscal Policy. For Risky Times.Ecodate, 23(3), 2. Friedman, M. (1953), Essays in Positive Economics, London: University of Chicago Press. Haslag, J., & Hein, S. (1992). Macroeconomic Activity and Monetary Policy Actions: Some Preliminary Evidence.Journal of Money, Credit & Banking, 24(4), 431-446. Larch, M. and Nogueira, M. (2009): Fiscal Policy Making in the European Union - An Assessment of Current Practice and Challenges.Routledge. Love, R., & Payne, R. (2008). Macroeconomic News, Order Flows, and Exchange Rates. Journal of Financial & Quantitative Analysis, 43(2), 467-488. Mishkin, F. (2004), The Economics of Money, Banking, and Financial Markets, Boston: Addison-Wesley Neck, R., & Behrens, D. (2004). Macroeconomic Policies in a Monetary Union: A Dynamic Game.Central European Journal of Operations Research, 12(2), 171-186. Sinai, A. (2009). Macroeconomic Policy Challenges and Choices in a Time of Crises.Challenge (05775132), 52(2), 5-35. Soyoung, K. (2005). Monetary Policy, Foreign Exchange Policy, and Delayed Overshooting. Journal of Money, Credit & Banking, 37(4), 775-782. Sullivan, A. & Sheffrin, M. (2003). Economics: Principles in action. New Jersey: Pearson Prentice Hall. Read More